MEASURING COST SAVINGS AND BENEFITS REALISATION

Transcription

1 Greg Edmonds - Project Procure MEASURING COST SAVINGS AND BENEFITS REALISATION

2 Overview Introduction Cost Savings Measuring Savings Benefits Realisation Q & A

3 Cost Savings - Cost Avoidance A saving is an outcome that can reduce budgets. Outcomes are only savings if they are realised and are quantifiable. Cost avoidance is an outcome that attempts to thwart price increases and to keep within budget. Cost avoidance is not a saving; What are savings? Few Examples Agreeing a straightforward reduction in price Sourcing or developing a lower quality item (that still meets the purpose) at a reduced cost Negotiating retrospective rebates, improved payment terms etc. Negotiating improved terms and conditions, improved service levels etc. Source: CIPS

4 A Typical Savings and Benefits Measurement 1 Define the scope 2 Define the units of comparison 3 4 Baseline the current costs Predict-the future costs Ongoing Measurement 5 Compare: what are the savings and benefits? (Budgetary Non-Budgetary)

5 Savings and Category Types A study by KPMG across direct and indirect categories in various sectors reveals: Procurement generally influences less than 60% of spend across both direct and indirect categories. Centralised and centre-led functions report the highest levels of cost reduction and spend under management. Savings Achieved ~3-5% on direct categories and ~3-10% on indirect categories Source: KPMG 2012

6 Savings and Asset Types $$ $$ $$ $$ $$ Capex Opex Savings on Capital Expenses Visible in cost flow Atypical Amortised/Depreciated Long-term assets P&L Impact: Over time Savings on Operational Expenses Visible in P&L Typically recurring Expended Selling, general and administrative expense P&L Impact: Immediate

7 What is the most important metric for measuring procurement s performance in your company? Identified Savings Implemented Savings Booked Savings Cost Avoidance Spend Under Management

8 What Do Best in Class Organisations Achieve? Leakage Identified Savings Negotiated Savings Implemented Savings Bottom Line Savings Analysis Sourcing Project Payment Procurement Finance Check your maturity class..

9 Savings - Challenges Challenges Savings means something different to different roles in organisation Sourcing/Buying Manager: Savings can mean incremental discounts I negotiated from the supplier s first quote or otherwise benchmarked market process across anticipated purchase volumes Finance Manager: I may look at savings as the direct costs or expense reductions reflected as a positive variance or working capital improvement in my budget CFO, Controller or Treasurer: Savings is something that impacts earnings or cashflows plans including financing and global exchange implications Procurement savings get lost in translation Procurement savings has traditionally lacked credibility Baseline determination Reinvesting the savings Culture Supplier Relationship Lack of common standards Lack of consistency Lack of breadth in definition Procurement in the past has been guilty of Carrying over savings from previous years Inconsistencies in establishing market benchmarks Assumption with high inflation rates Mishandling of changes in unit price and quantity Overestimating savings assumptions due to process change Determination of baseline Process standardisation Savings in government sector Savings against the baseline spend Savings in government sector Savings against the baseline spend Miscommunicating the value delivered by a service provider Savings against the baseline spend Impairing the relationship between the client/company and the service provider

10 Where Could Savings Be Lost? Issue(Examples) Category How can it happen How can it be avoided Price non compliance Marketing Rate cards are not being adhered to Vendor non compliance Volume non compliance General professional services MRO Sourcing from non approved agencies, suppliers SKU s have been changed. Spend is up, volume on negotiated SKU s is low Cost tracking Standardised reporting Category management Cross referencing with periodic spend analysis Supplier performance management Delays Packaging Negotiated SKU s are not entered into ER delaying savings inflow Clear process ownership during sourcing transition Change of scope/requirements IT Hardware change, scope change during the implementation Proper needs gathering and approved checks for decision impacting savings Contract governance Transportation Freight savings diminished due to unstructured accessorial changes with carriers Regular spend analysis Category management Commodities Direct No proper index/indices used for price adjustments Proper mechanisms for price escalations

11 Making It Count Critical Components For Benefits Realisation Process Outline ownership and method of savings, tracking and compliance Collaboration Technology Benefit Realisation Process Category & Contract Management Strategy for category management, contract management and monitoring supplier performance management etc. Technology Technology adoption for tracking savings identified vs realised Category & Contract Management Collaboration Collaborate closely with finance, stake holders and suppliers

12 Process Identify Analysis Prioritise Implement Monitor Stabilise Opportunity Execute Keep Control Realisation Planning Tracking Savings Budget

13 Quick Poll How are you tracking your savings? Excel Spreadsheet Automated Tool Software Others

14 Maximise Savings Through Technology Adoption Technology adoption and metrics monitoring Will offer decision makers the ability to monitor and measure KPIs related to cost reductions and cost avoidance. Identified Savings Negotiated Savings Implemented Savings Bottom-line Savings Technology Adoption within Procurement

15 Maximise Savings Through Category and Contract Management Contract Negotiation Implementation Process Contract Compliance Lost Savings via Leakage (14-24%) Negotiated Savings from Sourcing Average Savings Leakage 21% (100%) Realised Savings (76-86%) Time Source: Aberdeen Effective contract management is one critical element for the successful realisation of benefits

16 Quick Poll What are the biggest challenges when sharing savings information within your organisation? Lack of Time Ease of Use Scalability Ability to Demonstrate Savings

17 Collaborate Involvement in validation of spend and baseline determination Ongoing cost tracking, compliance measurement, non-compliance reporting Agreement on savings tracking and reporting methodologies (Templates & Frequency) Suppliers The below table reflects direct opportunities gained by increased internal collaboration. Stakeholders Spend Analysis Sourcing Savings Tracking Finance

18 Q&A

19 Thank You Visit us at Booth 19 Brisbane Level Edward Street BRISBANE QLD 4000 t : +61 (0) f : +61 (0) Sydney Level 8 60 York Street SYDNEY NSW 2000 t : +61 (0) f : +61 (0) Project Procure is part of the Charles Kendall Group of companies